Loan Forgiveness, Paycheck Protection, Payment Deferral & Eligibility Under the CARES Act
Published on by Cheryl Ganim, Andy Bertke, in COVID-19, Tax Services
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The Coronavirus, Aid, Relief, and Economic Security (CARES) Act passed in the Senate in the evening of March 25, 2020.
Details of the Senate bill follow:
Who qualifies?
An ‘impacted borrower’ means an eligible recipient that is in operation on February 15, 2020; and has an application for a covered loan that is approved or pending approval on or after the date of enactment of the Cares Act. An impacted borrower is presumed to have been adversely impacted by COVID–19. Eligible recipients are defined in the Families First Coronavirus Act. This includes small businesses (fewer than 500 employees) impacted by the pandemic and economic downturn make payroll and cover other expenses. Small businesses may take out loans up to $10 million and cover employees making up to $100,000 per year; loans can be taken for this purpose if the business does not lay off its employees (forgiveness is scaled down as layoffs rise). In order to be eligible for a loan, a firm must maintain an average monthly number of employees during the covered period that is no less than the number it had before the crisis began.
What is a ‘covered loan?’
A loan made under the Care Act during the covered period: February 15, 2020 and ending on June 30, 2020. It includes liabilities of the borrower that are loans guaranteed by the SBA, as well as covered mortgage loans incurred before February 15, 2020.
Loan forgiveness
‘‘Expected forgiveness amount’’ means the amount of principal used to cover payroll, payments of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation); covered rent obligation; and covered utility payments.
Eligible payroll cost means salary, wage, commission, or similar compensation; payment of cash tips, retirement, vacation, sick leave, payment of State or local tax assessed on the compensation of employees; healthcare and retirement benefits. Sole proprietor or independent contractor compensation means wages, commission, income, net earnings from self-employment, or similar compensation and not more than $100,000 in 1 year, as prorated for the covered period.
Forgiveness of indebtedness on a covered loan shall be considered canceled indebtedness. Loan forgiveness cannot exceed the principal amount financed. The loan forgiveness will be reduced (but not increased) by multiplying the loan forgiveness amount by the ratio of reduced number of employees during the covered period divided by the average number of employees during February 15, 2019 and ending on June 30, 2019, or during January 1, 2020 and ending on February 29, 2020. The reduction to loan forgiveness does not apply if employees are rehired by June 30, 2020. Documentation will be required to be provided to the lender to obtain loan forgiveness. The forgiveness of debt amounts will not be included in taxable income. Loan recipients must maintain existing employment levels “to the extent practicable” during the loan term and cannot reduce their employment levels by more than 10%.
Limitations
Stock buybacks are prohibited for the duration of the loan plus one additional year. Dividends may not be paid on the business’s common stock for the term of the loan plus one additional year.
Limitations on the total compensation of highly paid workers for the term of the loan plus one additional year.
Covered loans with balance after loan forgiveness under section 1106 of the Cares Act will continue to be guaranteed with a maximum maturity of ten years. The interest rate is not to exceed 4%.
Detailed information on 7(a) Loan Program (pending vote in House 3/26/20)
Eligibility
- Covered period of March 1 through December 31, 2020.
- Eligible Recipient is a small employer with 500 EE’s or less. Guidance forthcoming on whether this is per physical location or company-wide (think restaurants and hotel chains).
- Guidance and regulations to be issued within 30 days of enactment of the Act.
- The lender under section 7(a) in evaluating the eligibility of a borrower for a loan shall only consider whether the borrower was in operation before March 1, 2020 and had EE”s and paid salaries and payroll taxes.
- Applicant must have physical presence in a declared disaster area. Ohio, KY and IN are approved disaster areas.
- SBA is to waive all applicable fees.
- No prepayment penalty on a loan made before 1-1-21.
- Max loan is lesser of: A) the average monthly payments for payroll, mortgage, rent, and other debt for the one year period before the loan is made X 4, or B) $10M
- Loan can be used for payroll support for sick pay and medical leave, employee salaries, to pay – mortgage payments, rent, utilities, any debt obligations incurred before the cover period.
- Cannot double up – if a borrower receives assistance for COVID 19 purposes of paying payroll and providing payroll support it cannot borrow under 7(a) for the same purpose.
- Deferred loan payments up to 1 year are available. Interest continues to accrue.
- Express loans up to $1M for up to a 7 year term, and are approved or denied in 36 hours.
Forgiveness
- For loans guaranteed under 7(a) made during the covered period.
- An eligible recipient shall be eligible for forgiveness of indebtedness in the amount equal to the cost of maintaining payroll continuity during the covered period.
- Payroll costs does not include EE compensation in excess of $33,333 during the covered period, qualified sick leave and family leave wages for which a credit is allowed under the FFCR Act.
- Limit of forgiveness – (not taxable)
- The forgiven amount shall not exceed the sum of A) the total payroll costs incurred during the covered period, plus B) debt payments made during the covered period on debts incurred before the covered period.
Reduction in loan forgiveness
- Loan forgiveness is reduced by the percentage equal to the difference obtained by subtracting the quotient obtained by dividing the avg number of FTE per month employed during the covered period by the avg number of FTE’s per month employed during 3-1-19 to 6-30-19, or (for seasonal employers) the avg number of FTE EE’s per month employed during 3-1-19 to 6-30-19, From 1.
- The loan forgiveness is also reduced by the amount of any reduction in excess of 25% of compensation as measured against the last full quarter in which the EE was paid during the covered period for any EE who was paid an amount less than $33,333 during 1-1-19 through 6-3-19, or not more than $100,000 on an annualized basis during 2019.
Application process
- Submit application to lender that includes:
- Documentation that verifies the number FTE on payroll and pay rates for the periods identified under the reduction for loan forgiveness above. Such as:
- Payroll tax filings to the IRS, state payroll and SUTA filings
- Financial statements verifying payment on debt obligations incurred before the covered period.
- And, any other documents the SBA may ask for
Additional Resources
Download the Ohio Bureau of Worker’s Compensation COVID-19 FAQ here.
Visit Barnes Dennig’s COVID-19 Resource Center for a comprehensive list of communications. Please contact our COVID-19 Advisory Team or any of our leadership team at Barnes Dennig to discuss.
Barnes Dennig COVID-19 Advisory Team
- Cheryl Ganim
- Andy Bertke
- Matt Rosen
- Ryan Lauer
- Nick Pennekamp
